Colonial Pipeline Company
Colonial Pipeline Company is an interstate carrier of petroleum products. Owned by a consortium of energy companies, including Shell, CITGO, and Koch, Colonial delivers daily 95 million gallons of gasoline, home heating oil, diesel and other fuels to 12 states, through a system of pipelines and terminals.
Company officials engaged SmithOBrien to develop a custom methodology to quantify the effects on profitability of a three-year old initiative undertaken by the Organizational Development and Environmental, Health and Safety departments to eliminate fuel spills along its pipeline system. The engagement also included training company personnel on the methodology so they could report on the initiative's financial impact semi-annually.
Our methodology had three basic components:
- Review of the past five years of company data on the number and types of spills and their costs
- Use of the modified Delphi method to interview operations and finance department managers
- Use of Option Pricing to complete the financial analysis
In completing the analysis, we relied on existing company data and the knowledge-base and analytical skills of company employees. Thus the methodology could be implemented internally without introducing new accounting or data management systems.
Our consulting team found:
- The operations managers showed a good understanding of the direct and indirect costs of incidents. However, many of the finance experts lacked a solid understanding of operations and its affect on company finances. Thus the costs of operational errors were significantly underestimated.
- Internal reporting systems developed prior to this initiative had to be realigned to reflect the needs of current decision-making.
- Operations managers had a strong commitment to the initiative's goals. They were competent at estimating the frequency and variability of operational errors, resulting in spills. However, their analytical skills and learnings remained within their specialty area and were not shared with others in key business functions.
Our analysis calculated that the initiative's success had saved the company at least $490,000. Every reduction of 10 spills per year would provide an additional $490,000 annually.